Regulatory divergence is on the rise across several key markets. As a result, corporates of all shapes and sizes are facing increasingly complex digital reporting requirements and legislation — subsequently affecting their respective bottom lines.
According to research conducted by the Centre for Economics and Business Research (CEBR), UK exporters to the EU alone lost out on £47.6 billion worth of revenue due to cross-border tax complexities in 2021.
The manufacturing sector has been hit particularly hard, and that is why it is more critical than ever before that each organisation’s indirect tax function embraces digital transformation to safeguard against this increasingly volatile and burdensome regulatory landscape.
Despite this requirement for digitalisation, the truth is that a vast number of corporates simply do not know where to start.
Accountancy Age caught up with Ruby Buckland, head of EMEA Business Development Avalara. With over 20 years’ experience in indirect taxes and tax management consulting, Buckland specialises in International Strategy — meaning she is a critical resource for organisations looking for a digital-led indirect tax compliance strategy.
Why are we seeing the pace of digitalisation quicken in the indirect tax space?
We are definitely seeing the pace of digitalisation picking up speed, and Tax Authorities (TAs) are really dictating that pace at the moment.
EU tax authorities have generally chosen VAT as their starting point for the digital tax journey, but they’re now moving on to other tax types and accounting treatments.
That is why it is important businesses address these regulatory demands now, educate their employees about the necessity to comply and truly understand the importance of getting their response right when it comes to meeting these new requirements.
If businesses can adapt to these changes now, later tax changes will feel less radical, and businesses will be better prepared.
There are three main buckets to consider here:
First, there’s the regulatory landscape. We have seen the introduction of a range of advanced reporting requirements (many of which are digital). Examples include SAFTs, control lists, real-time reporting and e-invoicing, all taking a step away from your traditional periodic returns.
On top of that, we have ongoing complexity — with ever-changing rates and rules, and unique compliance requirements among different global tax authorities.
Secondly, evolving market dynamics have impacted businesses and supply chains. The response by tax authorities has been to turn to digital tax measures to collect tax more effectively and reduce the VAT gap.
Lastly, there’s the age-old issue of resources. Remaining compliant requires a unique blend of resources across people, processes and technology. This can be a difficult balancing act for some businesses — with one recent Deloitte study indicating many tax functions are having to do the same or more with budgets and headcount that are remaining flat or falling.
What are the primary hurdles slowing digital transformation in terms of indirect tax, and how can those hurdles be overcome?
The speed of change is fairly fast in the worlds of e-reporting and e-invoicing — and that in itself is a challenge.
We have seen some great ideas from different TAs and some great technological advances. Unfortunately, there’s been little standardisation to date. This is what makes it really hard for global businesses that are simply trying to just operate in a compliant fashion across different countries.
This discussion would not be complete without me raising VAT in the digital age (or ViDA as it is more commonly known). ViDA was finally unveiled on 8 December and will dictate a common standard for digital reporting across Europe, which will result in some harmonisation making it easier for businesses to comply with the demanding requirements.
As a side note, we are finding that businesses are enthusiastic about the move towards e-invoicing, seeing it as an opportunity to transform operations. However, tightening budgets may impact firms’ ability to respond in a timely fashion.
How important is it that organisations are getting it right the first time when it comes to indirect tax?
This is going to become more important as businesses turn to real-time reporting and e-invoicing regimes roll out over the world.
TAs will have a wealth of information at their fingertips, and every transaction plus related granular data will be received and stored by TAs. They will be able to run advanced data analytics, and they will eventually have the ability to prepare VAT returns on behalf of businesses based on the data received through live reporting and e-invoicing.
This move away from traditional indirect tax compliance means it is important to get tax right first time. The cleanliness of master data and correct determination of tax codes will be vital to ensure that a business’ compliance position is correct.
How do you think the indirect tax function could be creating more value for businesses?
Firstly, the function should be ensuring it delivers one of its main directives, which is likely to be ensuring compliance for the business (meaning a reduction in fines and penalties).
This sounds really simple — after all, it is what an indirect tax compliance function was most likely created to achieve. But in an environment where margins are really tight, it is more important to make sure the tax is right, and the penalty position is minimised.
The second thing indirect tax should be doing is to be an ‘enabler’ for business. Let us take an example here: Italian SDI. To do business in Italy, you need to have an agile e-invoicing solution otherwise, the customer does not get the invoice and you risk being unable to collect the correct monies for the transaction.
On the AP side, you want to ensure suppliers get paid so supply chains are not interrupted. Where the indirect tax function takes the lead on such a project and is a key stakeholder, this could help the internal brand, which in some instances historically has been seen as a blocker or burden.
Lastly, there are many benefits to the switch to digitalisation and the indirect tax function could become an ambassador for championing these. The benefits include a reduction in paper documents, access to higher quality data to make more informed decisions, freeing up staff resources and quicker processing and payments.
What advice would you give to organisations that have yet to integrate digitalisation as part of their wider indirect tax strategy?
I would say: do not panic, you are not alone! However, it is time to start thinking and preparing for the change needed by considering your digitalisation strategy. This could be broken down into four parts.
The first is awareness. That means having advanced knowledge is key and gives you more time to prepare for the changes that you need to make.
Next, there is horizon planning. You need to have a plan for how you intend to keep on top of new mandates or changes in scope, be it format standards or absolutely new mandates that are coming forward.
You must then look for synergies between requirements and identify the differences so you can determine how to roll out your approach in an effective fashion.
Lastly, you should invest in a single scalable provider or solution that allows you to think strategically and globally — and not tactically and locally. This will mean as you move into new market scenarios, it is more of a switch-on rather than scrambling around trying to find a provider.
Looking into the future, what do you think we can expect to see change in terms of the indirect tax function and how organisations engage with indirect tax?
One thing we expect to see is more of a slimmed-down function with a larger percentage of tax technologists and data scientists as opposed to traditional tax technical individuals.
Next, expect to see VAT compliance become a BAU process through a higher use of technology and automated e-invoicing and e-reporting.
And lastly, the function will become more focused on strategy, policy and awareness — typically through a higher level of senior professional. The function will also become more of a strategic advisor to the business — partnering across different areas such as M&A, advisory, tax authority discussions. Horizon planning and (yes) horizontal monitoring.
That being said, a lot of that will be through technology and automated processes, data analytics and AI/ML used to test and spot risk for issues and errors.
If you had to have a closing statement on what the future holds for indirect tax compliance, what would it be?
I would look to the future with a quote from Benjamin Franklin in mind: “there is nothing more certain than death and taxes”.
The digitalisation of taxes is here to stay. However, it is important to remember that this comes not just with complexities — but opportunities too.
If your organisation is looking to leverage those opportunities, it’s critical that you select a capable solution like Avalara.
Avalara’s tax automation software makes things as simple and straightforward as possible for its clients, ensuring corporates can mitigate the severe consequences of tax noncompliance.
If you are an eCommerce or software business looking to make tax compliance easier, click here to learn more about what Avalara could do for you.